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Mergers and Divisions of Companies and Transfer of Assets

When implementing an investment project, it is sometimes necessary to merge or divide the target company or to transfer its assets to another company. Slovak legislation provides for several procedures for carrying out such transactions. In our article, we would like to briefly outline those procedures and describe their advantages and disadvantages.

When implementing an investment project, it is sometimes necessary to merge or divide the target company or to transfer its assets to another company. Slovak legislation provides for several procedures for carrying out such transactions. In our article, we would like to briefly outline those procedures and describe their advantages and disadvantages.

The above outlined corporate changes can be carried out by (i) mergers and divisions of the target company, (ii) or by sale of the enterprise or its assets of this target company

A.Mergers and Divisions

Slovak law provides for the following forms of mergers and divisions of companies.

a) Merger by Acquisition (in Slovak: splynutie)Merger by acquisition is a procedure where one or more companies cease to exist by winding-up without liquidation and the assets of the wound–up companies are transferred to another, already existing company, which thus becomes the legal successor.

b) Merger by Formation of a New Company (in Slovak: zlúčenie)Merger by formation of a new company is a procedure where two or more companies cease to exist by winding-up without liquidation and the assets of the wound-up companies are transferred to another newly established company, which thus becomes the successor.

c) Division by Merger (in Slovak: rozdelenie spoločnosti zlúčením)The Slovak Commercial Code recognises two forms of division of companies. The first is division by merger. During this procedure, the assets of the wound-up company are transferred to other already existing companies, which thus become its legal successors.

d)Division by Formation of New Companies (in Slovak: rozdelenie)The second form is division by the formation of new companies, in which the assets of a wound–up company are transferred to the newly established companies, all of which become its legal successors.

In all of the above described cases, the legal successors of the wound-up companies arising from the mergers and divisions are liable for their predecessors’ financial obligations. In the case of division, the legal successors are jointly and severally liable.

Merger by acquisition, merger by the formation of a new company and both forms of division are among the forms of winding-up companies without liquidation that may last more than two years.

These merger and division procedures have many common features, but each of them is suitable for a different situation. Merger by acquisition is suitable in cases where one existing and operating company acquires another existing and operating company/companies and it is appears to be favourable to merge the assets of these companies under common management (control) i.e. into one legal entity. After the completion of the merger by acquisition, the surviving company will be the acquired companies’ legal successor and the acquired companies will be wound-up and subsequently deleted from the Commercial Register. The property of the wound-up company has to be revalued. The surviving company will assume all the acquired companies’ assets and obligations, including tax, social and health care payments, labour relations, and even possible environmental damage that might be present on the target company’s property.

In the case of merger by the formation of a new company, all of the participating companies cease to exist and all their assets and liabilities are transferred to the newly established company. The newly established company is liable for all the wound-up company’s obligations. Merger by formation of a new company is suitable in cases where it is necessary to create a new company by merging two existing and operating companies and if it is appears to be suitable to revalue the property of both participating companies.

Division is the reverse of mergers. During a division, the divided company’s assets and obligations are transferred to successor companies, in accordance with the project of division. However, the successor companies are jointly and severally liable to the wound-up company’s creditors. The division is suitable in case of large real estate projects and where two or more different projects with different features will be carried out. The original company which owns the assets (i.e. land) will be divided into smaller special purpose companies. The division is also suitable where a company performs different activities and it appears suitable to spin-off some of those activities into a separate company.

From the legal point of view, mergers and divisions are among the most difficult corporate operations. Over the course of these operations, the participating companies have to prepare a relatively large number of documents. Most of these documents have to fulfil the formal requirements imposed by the Commercial Code and other applicable laws and statutes.

Documentation Merger

The principal document which provides for the basic terms and conditions of the merger, regardless of whether a merger by acquisition or merger by the formation of a new company is involved, is the Merger Agreement. The Merger Agreement is usually subject to the approval of the General Meeting of all participating companies. The Merger Agreement has to specify the following terms and conditions:

1. Exact identification of all participating companies and their legal form,

2. What share the wound-up companies’ shareholders will have in the successor company and/or the shareholders’ contribution to the successor entity,

3. A draft of the successor company’s Memorandum of Association (in the case of joint stock companies, a draft of the Articles of Association also),

4. The date from which the acts of the wound-up companies shall be regarded from the accounting point of view as executed on the behalf of the successor company,

5. Identification of the members of the statutory bodies (in case of joint stock companies ensuing from the merger, the members of the supervisory bodies also).

Division

The principal document of the division is the Project of the Division. The Project of the Division has to contain terms and conditions similar to the Merger Agreement. In addition, the Project of the Division must also contain a detailed description and specification of the wound-up company’s individual assets and obligations that are to be transferred to the individual successor companies and the provisions for the division of the individual successor companies’ shares between the divided company’s shareholders.

One of the most important preconditions for the performance of mergers and divisions is that participating companies must have the same legal form. The only exception from this rule is the situation by merger by acquisition where a limited liability company is merged with a joint stock company and the joint stock company is the surviving entity.

B.Sale of the Enterprise, Sale of the Selected Assets

The Contract for the Sale of an Enterprise and Contract for the Sale of Selected Assets occur when the assets and obligations used to operate a business are transferred without the necessity of acquiring the corporate shell.

a) Contract for the Sale of an Enterprise The Slovak Commercial Code defines the enterprise as the entirety of tangible and intangible assets and personnel qualifications utilised in business. An enterprise is also formed by chattel, rights and other material values, belonging to an entrepreneur and used, or, due to their characteristic, envisaged to be used in the course of operating the enterprise.

The sale of the enterprise in its entirety is effectuated with a Contract for the Sale of an Enterprise. The contract has to specify chattel, other rights, other tangible values related to the enterprise’s operation. Therefore, under the Contract for the Sale of an Enterprise, all assets related to the enterprise’s operation are transferred to the buyer. The buyer also has to assume all obligations related to the enterprise. The Contract for the Sale of an Enterprise does not have to be approved by the creditors of the entity selling the enterprise. However, the seller’s creditors are entitled to request a judicial ruling that the transfer of their receivable from the seller to the buyer is ineffective.

b) Contract for the Sale of Selected AssetsAs the name of this contract implies, this contract allows only selected assets specified in the contract to be transferred to the buyer. The buyer does not have to assume any liabilities or obligations related to the enterprise or the entity that owns the enterprise. If the buyer were interested in assuming certain contracts related to the purchased assets, then it would be necessary to conclude a trilateral agreement between the parties, specifying the terms and conditions of such transfer. However, due to the fact that the provisions of the Slovak Commercial Code do not expressly stipulate the rights and obligations of the transferor, a certain risk exists that the transferor will sell the assets in order to avoid the fulfilment of outstanding obligations. There is also a risk that, in certain circumstances, labour law obligations will also be transferred. In such a case, the transferor’s creditors would be entitled to request a judicial ruling that would declare the transfer of such assets invalid. The main advantage of the Contract for the Sale of Selected Assets is that the transferee may cherry-pick the assets he wants to buy. The buyer is not, in this case, forced to become part of the transferor’s corporate history, which sometimes might not be entirely revealed to the buyer.

C.Conclusion

The main difference between mergers and divisions and the enterprise/assets sale contract is that in the latter case the corporate shell of the enterprise is not transferred.

With all the above described procedures, with the exception of the Contract for the Sale of Selected Assets (these must not form a complex part of the enterprise or be capable of fulfilling a special purpose), all rights and obligations are transferred to the legal successor or buyer.

With Contracts for the Sale of an Enterprise and Contracts for the Sale of Selected Assets there is a risk that the seller sells the enterprise/assets to evade liabilities. If this is the case, the creditors would be entitled to claim that the transfer is invalid.

All of the above described procedures usually involve considerable due diligence work, due to the fact that the investor enters into long-term complex legal relations. The investor may also enter into the corporate history of the company (or enterprise). The Buyer usually assumes the responsibility for all risks, even those which might emerge after the transaction.

Mgr. Ing. Matej Šebesta is an Associate with NÖRR STIEFENHOFER LUTZ s. r. o. This article is of an informative nature only. For more info go to www.noerr.com.

10. Nov 2008 at 0:00
| By Mgr. Ing. Matej Šebesta

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